At least the Netherlands, Ireland, Luxembourg and Malta did not join the hypocrisy by including anyone on their lists.

Last Wednesday the EU Commission published a list of 30 countries,
including Barbados, that it describes as non-cooperative jurisdictions
on tax matters. The list is designed to tar-and-feather these countries,
to reduce their access to international development funds and so
pressure them into abandoning their international financial centres. It
is an act of gross discriminatory bullying that will become the modern
definition of colonialism.

The Netherlands, Ireland and Luxembourg are under investigation by
the EU Competition authorities for facilitating aggressive tax avoidance
that formed the basis of their own international financial centres.
These investigations followed the leaking of documents
to journalists that showed Luxembourg had entered into 548 private tax
rulings between 2009 and 2013 to allow 340 of the largest companies in
the world to avoid paying taxes in EU countries. The companies included
Pepsi, Amazon, Walt Disney,
Procter & Gamble, Ikea, Heinz, Deutsche Bank and J. P. Morgan. Yet
Luxembourg, Ireland and the Netherlands are not on the EU’s list.
Instead of tarring and feathering the countries with the greatest
source of tax losses to the EU, they have chosen to be judge and jury
over 30 small countries, powerless to defend themselves against wrongful
accusations.

The mix of countries that have tax minimising regimes is not
differentiated by large or small, rich or poor, black or white. But the
EU list is. This kind of discriminatory bullying will serve to undermine
international efforts to establish a level playing field on tax
matters. Why should countries sign the OECD Multilateral Convention on
Mutual Administrative Assistance in Tax Matters, as many of the targeted
countries have, if they still get tarred without any due process based
around evidence, non-discrimination and other aspects of natural
justice. It also fosters the very tax avoidance the EU claims to be
trying to stop. Recall that the activities of Luxembourg, Ireland and
Netherlands were common knowledge for decades but the EU was only
compelled to investigate after the public outcry that followed press
reports. Blatant discrimination doesn’t reduce tax avoidance; it shifts
it. When Apple, Google and Starbucks want to avoid EU tax, they know
where to go.

The EU’s actions would make Jack Warner blush: be thick in the middle
of hundreds of deals avoiding billions of taxes, then accuse Niue, a
Pacific island state with a GDP of $10m, as a major threat to the tax
receipts of European governments. President of the EU Commission, Jean
Claude Juncker was Prime Minister of Luxembourg when the tax deals were
being developed. He has adopted the Warner defence: “I have nothing to
reproach myself more than others would have to reproach themselves…”
Incidentally, FIFA, is headquartered in Switzerland, another country
that does not appear on the EU’s list. The EU is saying that Swiss
activities are far less a threat to EU tax revenues than those that take
place in Niue, Montserrat, Liberia, Vanatu, St. Vincent, St. Kitts and
the Cook Islands. Do you know a more intellectually bankrupt idea?

“We have this imminent bond-buying by the ECB -- at least
that’s what everybody is expecting -- and if euro-zone yields
are falling that makes Treasury yields relatively attractive,
even at these rates,” said Philip Marey, a senior market
economist at Rabobank Groep in Utrecht, the Netherlands.(link)

The current state of play for selected sovereign 10 year bonds (with a minor highlight added to the FT graphic):

A scant year ago 10 year Spanish, Italian and Irish credit was cheaper than the US equivalent. And that was at a time when Euro QE was already in the air and US inflation was stirring. Today they are all dearer with only the Grexit candidate and Portugal still on EU special offer.

Come Thursday a very material ECB QE programme will likely become a reality. Switzerland 10 years have already voted: it will mean too many euros in circulation (well, certainly for the Swiss economy).

But what do they know anyway? It's not like Switzerland is a country that is particularly innovative, competitive or even a nice place to live.

In less than 48 hours Mr Draghi will take a shot at spurring them to greater effort in these areas. A devaluation in one's largest export market will be a live demo of an economic tool Switzerland should long have considered weaving into its own set of sad, obsolete and tired economic policies.

Someone took the trouble to quantify what most owners of small French business structures (ie under 250 employees) have known for a long time: they are getting a seriously bad deal compared to, erm, just about every peer one can think of.

The following table comes from the Vernimmen site (Letter 128, December 2014) and compares a business reporting the same numbers (ie turnover of €20m) in France as compared to Germany:

One of the key underlying points is that the French system has much higher fixed social charges (line 13 and 3 times those of the Germany peer expressed as a percentage of profit after tax). And there is never any relief for these even in times of crisis and losses (as described in the final para). Layoff costs, for example, will be borne by the firm whereas in Germany they would not be.

But the authors do not simply moan about it. They offer four concrete suggestions to at least begin leveling the playing field. It is clear enough that peers, not only Germany but also those in Scandinavia, undermine the usual anti-capital arguments for soaking small businesses. It would be a bold step for an administration with not much more to lose to give the small business sector the shot in the arm it needs.

Two competing – but sometimes overlapping – approaches to relative value / pairs
trading are to take either a fundamental ‘signal’ view based on changes
to factors such as the accounts, the economy, the CFO’s penchant for
recognizing revenue early and so on; and the ‘noise’ approach whereby
the trader concentrates on the divergence in value of the instruments
for reasons unrelated to changes in fundamental conditions.

Bloomberg occasionally publish pairs trading ideas in the first category. Like this one for HCN/SPG. One reading suggests that it is really a macroeconomic call using the
pair as a proxy and the 10 year bond yield as a trigger.

Should pragmatism be a consideration, you may wonder how to avoid over-reliance on those analysts forecasts and GDP predictions cited when applying this idea (see prior blog or this from Larry Summers for why this might be a concern). Even the yield differential heralded as an advantage depends on how the trade is set up - money neutral vs beta neutral for example - thus potentially mitigating the joy of the headline.

But onto the history. Taking the 2001
and 2007 recessions as precedents, as the piece does, the trade
would have made 16% over 8 months and 35% over 18 months respectively
(on a dollar neutral basis). Outside of those rather difficult-to-time
periods SPG has outperformed HCN by a wide margin since 2002 (this
is shown on the Indexed Prices & Spread graph below).

Not bad. But 2 trade entry data points is not a trend.

The noise approach (here lend some rigour with cointegration) would have used far smaller holding times inside
both those recessionary periods. Taking the August 2007 to March 2009
meltdown, for example, an uncomplicated strategy (backtest graph below)
would have traded 4 times for a total gain of 17% (and an average return
on capital invested per trade of 4.2%). The total holding period of 2 months means, once annualized, that ‘noise’ beat ‘signal’ by over 4 to 1.

Plagiarists & Pirates note...

Copyright since 2004, Rawdon Adams.
All Rights Reserved.

Credo

"The game of professional investment is intolerably boring and overexacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll"

- JM Keynes, The General Theory of Employment, Interest and Money, 1936. I forget which page.

Man cannot live by bread alone

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